Emerging markets and other risk-on investments took a hit last
week as economic data from the U.S. and China both showed weakness
in the global recovery story.
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caption="Better known for risky behavior outside this room than in
it."]
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Markets were first battered by weak employment numbers out of
the United States that showed the rebound in jobs was not a one-way
trajectory. The disappointment is likely the result of warmer
weather over the winter months which beat expectations by around
50,000 jobs in each of the three months. With a shortfall of around
100 thousand jobs, we could see further weakness in April's numbers
before the recovery continues.
China disappointed investors with both trade and GDP data last
week. Though GDP growth overshadowed everything else with a
lower-than-consensus 8.1% growth, the trade data on Thursday
suggested import demand may not fuel global growth as investors had
hoped.
Still, pockets of strength across emerging markets exist and may
become clearer this week. Economic data is fairly light but some
key reports could help pick relative strength across the major
regions.
Monday, April 16
Unlike other countries, India reports a wholesale price index to
measure inflationary pressures instead of a CPI. The index,
published Monday, is forecasted to drop marginally to about 6.65%
from the prior month's 6.95% on an annualized basis. This is still
stubbornly high and likely to influence monetary policy going
forward. Other economic data suggests that the bank will have
little choice but to cut rates to protect a still weak economic
rebound.
Brazil's market got hit hard on Friday after the Chinese 1st
quarter GDP report. Chinese demand amounts to 17% of Brazil's
exports and the disappointing report, following equally
disappointing trade data that showed weakness in import demand,
turned investors bearish on the South American country.
Brazil reports its monthly economic activity index on Monday
with expectations of 0.45% growth on an annualized, non-seasonally
adjusted basis. This is considerably lower than the 1.44% growth
reported last month. Investors may still be in for a surprise to
the downside. February retail sales broke a three-month series of
growth for a decline of 0.5% from January.
The government and monetary authorities in Brazil are engaged in
some fairly aggressive tactics to spur growth which may help the
country pick up in the 2nd quarter. If growth in key markets
remains sluggish, equity performance could diverge between those
companies serving the domestic market outperforming exporters,
despite currency intervention to keep exports cheap.
Tuesday, April 17
The Central Bank of India meets Tuesday to decide the policy
repurchase rate. While pricing pressures remain high and energy
threatens further inflation, other economic data will most likely
push the authorities toward a rate cut. Industrial production for
January was revised down to 1.1% growth from a previously reported
6.8% annualized. The consensus estimate is for a 0.25% cut in the
repo rate to 8.25%. While this might move the markets to the upside
in the short-term, the stubborn economy and high inflation may make
the gains short-lived. As was seen last year, the Indian market
could be the most vulnerable to a second half slowdown.
Wednesday, April 18
The Central Bank of Turkey will meet to decide the one-week
repurchase rate, though no change in policy is expected from the
current 5.75%. The central bank has tried to counter depreciating
pressure on the lira with strong talk on tightening monetary policy
but isn't likely to actually make any bold moves. While economic
growth has been good lately, it remains at risk from problems in
Europe.
Investors are widely expecting a dramatic move on the part of
the Central Bank of Brazil. Consensus is for a 0.75% cut in the
benchmark SELIC rate to 9.0%. The authorities have made statements
over the past few months implying that interest rates will not be
cut further than the current historic low of 8.75%, but a full
percentage cut is not out of the question. With rates approaching a
low-end target, look for the government to institute more
non-traditional methods of protectionism and economic stimulus.
Domestic companies supporting local consumption should do well
against importers.
Thursday, April 19
Poland remains the stronger of the investable countries within
Eastern Europe. Unemployment is still high but employment growth
has outpaced real wage growth so companies should see higher profit
margins. Producer prices are due out on Thursday and are forecast
to drop strongly to 4.8% from last month's 7.9% annualized
growth.
Polish industrial output is also due out on Thursday with
consensus estimate for 4.5% annualized growth against last month's
read of 4.6% growth year-over-year. Neighbor Germany has been
surprisingly strong given the rest of the problems in Europe so the
risk may be to an upside surprise in the numbers out of Poland.
Investors are limited in options for the Polish market but could
look at the iShares MSCI Poland Investable Market (
EPOL
,
quote
).
Russia reports both retail sales and real wage growth on
Thursday as well. The market is expecting retail sales to remain
strong, increasing 0.3% to 8.0% on an annualized basis. Real wage
growth is expected to come down to an increase of 11.6% over the
last 12 months. Strong domestic demand and increased spending ahead
of the recent elections may set the stage for a surprise to the
upside in wage growth. This could put further pressure on the ruble
as more monetary tightening would be needed.
Banco LatinoAmericano (
BLX
,
quote
) is scheduled to report first quarter earnings before market open.
Consensus is for a gain of $0.54 per share against $0.44 per share
in the same quarter last year. The bank was established by the
region's central banks to facilitate trade financing to commercial
banks and companies in Latin America and the Caribbean. As such, it
does not provide retail services. Shares trade for around 8.9 times
trailing earnings and pay a healthy 5.0% yield. Though the region
is fairly healthy, investors may have cause for concern over
slowing global trade and protectionist measures out of the
region.
Friday, April 20
Colombia will wrap up the emerging market week with reports on
retail sales and industrial production. Industrial production is
seen increasing to 3.7% from last month's 2.4% annualized gain
while retail sales are expected to show an increase of 4.7% over
the last year.
The Colombian Finance Minister, at the CEO Summit of the
Americas this weekend, said that the government was studying
measures to
stem the rise in the peso
. The country's currency has rallied almost 10% this year, the most
of any currency tracked by Bloomberg. The country has repeatedly
had problems with currency appreciation as the authorities are
clearly less interventionist than neighbors in the region.
A weaker currency could come at exactly the right time this year
as the country finalizes negotiations on the free-trade agreement
with the United States. Stronger exports, combined with continued
domestic demand and high foreign direct investment into the energy
sector may drive equities to outperform.
While investors have access to only two Colombian companies,
Ecopetrol (
EC
,
quote
) and BanColombia (
CIB
,
quote
) through ADRs, a more diversified bet is available through the
Global X FTSE Andean 40 (
AND
,
quote
) which holds positions in Chilean, Peruvian, and Colombian
companies.
Disclosure: Long position in AND
.